Dante joins the podcast to break down the June employment report. While everyone agreed that the report was mostly good, concerns remain around the concentration of job gains and the slowdown in hiring. With job growth moderating and the unemployment rate edging higher, the team argues that the time is now for the Fed to start cutting rates.
Dante joins the podcast to break down the June employment report. While everyone agreed that the report was mostly good, concerns remain around the concentration of job gains and the slowdown in hiring. With job growth moderating and the unemployment rate edging higher, the team argues that the time is now for the Fed to start cutting rates.
Guest Hosts: Dante DeAntonio - Senior Director, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues. Of course, my two co-hosts, Marisa DiNatale and Cris deRitis. Hi guys.
Cris deRitis: Hey Mark. Can I ask you the question everyone is wanting to know?
Mark Zandi: Yeah. Fire away.
Cris deRitis: Who won the sandcastle contest?
Mark Zandi: Oh, right Friday after July 4th. We haven't played that in a couple of years, Cris.
Cris deRitis: Oh, a few years?
Mark Zandi: Yeah, because I think once we stopped winning and weren't getting trophies, it really wasn't as fun, but I think it really is the age of your kids. Our kids are older now, and they're not into sandcastles type they were... I think we got to wait for the grandkids now for that type.
Cris deRitis: All right. Could be a while.
Mark Zandi: But you're right. We'd come down to the south Jersey beach every Forth of July week and we used to play in this contest to make sandcastles. The way we won was not that we had any talent, it was just we were brute force. It's like we built the biggest damn castle there was. Even if it was pretty ugly. That can win you every once in a while, but I can't win you consistently, I guess. How was your July 4th?
Cris deRitis: It was good. Pretty low-key, just with the neighbors here.
Mark Zandi: Yeah. Saw some fireworks?
Cris deRitis: Free fireworks show, because there's another neighbor that puts on a huge display.
Marisa DiNatale: DIY.
Mark Zandi: Oh, wow.
Cris deRitis: Everyone just sits on a hill and watches.
Mark Zandi: Right. Marisa, what did you do for July 4th? Do you get fireworks and hot dogs and...?
Marisa DiNatale: I went to a friend's house and we cooked and drank and all that. We didn't go watch fireworks. I actually was leaving their house and I saw five different firework shows from the car on my drive home.
Mark Zandi: Oh, very cool.
Marisa DiNatale: Yeah.
Mark Zandi: Well, here in the beach for the first time, at least that I've noticed, they do the fireworks from a barge. It used to be they do it on the beach.
Marisa DiNatale: That's what they do here.
Mark Zandi: Oh, is that right?
Marisa DiNatale: Yeah.
Mark Zandi: Well I saw them setting it up yesterday afternoon. I go, "What's that? What's that big tug in that barge doing?" And that's what it was. Yeah.
Marisa DiNatale: That's pretty cool.
Mark Zandi: Yeah, and, of course, we got Dante, Dante DeAntonio:. Hey, Dante.
Dante DeAntonio:: Hey, Mark. How's it going?
Mark Zandi: Good. Of course, this is jobs Friday, day after July 4th. How was your Fourth, Dante?
Dante DeAntonio:: It was pretty low-key, hanging by the pool and just relaxing.
Mark Zandi: Do you make sandcastles?
Dante DeAntonio:: My kids usually convince me. They're big into holes, not castles. We try to dig the deepest hole we can dig every year when we go to the beach.
Mark Zandi: That can be dangerous. You got to be careful, right?
Marisa DiNatale: Kind of break someone's ankle.
Dante DeAntonio:: I agree, yeah. Usually it's hard to get out of by the time the hole is fully dug and-
Mark Zandi: Oh my gosh.
Dante DeAntonio:: ... you got to fill it back in at the end of the day so somebody doesn't fall into it. Yeah, it's...
Mark Zandi: Well, some people have actually died, I think. They dug such a deep hole and they got in the hole and it caved on them.
Dante DeAntonio:: All right, when my kids ask me this year, I'm going to say to call you and you say it's unsafe.
Mark Zandi: You got to be careful.
Dante DeAntonio:: We shouldn't do it. Because I don't usually dig holes in my free time, but that's the one time I give in.
Mark Zandi: Yeah, you got to be very careful not to go too deep.
Dante DeAntonio:: Fair enough.
Mark Zandi: Just some parental advice.
Dante DeAntonio:: Good.
Mark Zandi: Well, of course it is jobs Friday and we got a jobs report. Not too bad, but I don't want to color your views, Dante. I know you got a view. You want to give us a sense of things?
Dante DeAntonio:: Sure. I think it's a middle of the road jobs report maybe, certainly weaker than what we saw last month, but I think probably a return to more normal expectations. Headline growth was 206,000 jobs added in June. Maybe the bigger story perhaps is negative revisions to the prior two months, which were quite large, a total of 111,000 in downward revisions. You took a three-month average job growth last month when we talked, that was 249,000 and then now sits at 177,000. A fairly different picture of what job growth looks like here in June relative to what we thought was happening in May. But, again, I don't think that's necessarily a bad thing. We've talked at length over the last 6, 9, 12 months about the need to see job growth slow and the labor market soften and moderate, and I think this report fits that story a lot more so than last month did. Industry composition was maybe a-
Mark Zandi: Can I just stop you before we go into the industry mix?
Dante DeAntonio:: Sure.
Mark Zandi: You're not worried that it's slowing too much? This is now more consistent with the other economic data we're getting, right? Like GDP, the real GDP growth is really throttled back. According to our tracking estimates, that you put together based on monthly data coming in, I think in this first half of this year, it's going to come in around one and a half percent. We have Q1, that was 1.4, and I think Q2, according to our tracking, is 1.4, 1.5. That's way down from last year. For calendar year 23, we got two and a half. That's a full percentage point down. Even more dramatic if you compare it to the second half of last year. Then you look at all the other data like the ISM surveys, they were really weak. They were below that 50 threshold for both the manufacturing [inaudible 00:05:53] vehicle sales, retail sales, unemployment insurance claims. Everything feels like it's really softening up here, which as you say is to some degree by design that cool things off. You don't think we're going too far here in the other direction?
Dante DeAntonio:: I don't think there's signs of that yet. Right now I feel like we're in a pretty good spot. Obviously, you don't want to see it go too far too fast, but I don't feel bad about this jobs report.
Mark Zandi: Right, okay. Those downward revisions, anything there? That's pretty surprising, right? I guess it would be consistent with the downdraft and the downshifting in growth, right? That would be consistent with that.
Dante DeAntonio:: Yeah, we've seen revisions of this size happen before over the last year. Certainly for May it's not concerning, since May started at such a high level. It went from 272 to 218, I think. April maybe causes a little more concern for people, now that the revised value is down to just 108,000 jobs added in April. But I still think, again, part of that is just month-to-month volatility. The average here is still pretty solid at 177 given everything that's going on.
Mark Zandi: Okay. All right. I stopped you, you're onto industry mix.
Dante DeAntonio:: Sure. Industry mix may be a little bit more concentrated this month in terms of the big contributors. Healthcare is still number one, added just over 80,000 jobs. Public sector was a bigger contributor this month than it's been recently with 70,000 jobs. Basically, three quarters of overall job creation came from just healthcare and the public sector. Construction is still holding up well. Manufacturing weak, turned negative again, which has done quite a few times here over the last year, sort of consistent with most of the other data that we have on manufacturing. [inaudible 00:07:53] obviously is a big weight on the headline number here. It fell almost 50,000 jobs in June. It's been down consistently for the last two years, but that down 49,000 is the biggest single month decline over that period. Even though it's been down, it's a unusually large decline in June. Other than that, there's not a whole lot interesting in the industry mix. A little bit of weakness in retail and manufacturing, but, again, that's not a new story here. Yeah. Household survey side of things-
Mark Zandi: Based on the industry, the narrative there has been... Because a lot of the job growth is in healthcare and government, and that's been the case now for a while. Maybe 6, 9, 12 months. The narrative has been that catch-up. Not ketchup, the tomato based thing, but catch-up. It's catching up. Those are the sectors that... Every other sector of the economy industry has hired back all the folks they lost during the pandemic and then some. Government and healthcare were just slower to be able to do that. In part because of the budgeting contracting process that's involved. It's just slower for that to occur.
And, of course, the other sectors could jack up wages much more quickly and attract workers in a tight labor market. But these industries are now catching up, that they're getting pretty close... I haven't looked recently, but I suspect they're pretty close to pre-pandemic levels, maybe even a little bit higher at this point. That's the narrative for the strong job growth in those sectors. If that's the narrative, then as they catch up, then you would expect that job growth to slow. Do you buy into that narrative? Does that make sense to you and do you expect a slowdown here?
Dante DeAntonio:: I think I definitely do for government. There, there was a pretty obvious lag in the return to hiring after the pandemic. Obviously, there's issues with the public sector being able to compete on wages. It seems like over the last 12 months they've obviously done much better at attracting workers than they had in 2021 and 2022. We've seen some slowdown. Government payrolls were flat in April. They were only up 25,000 in May, which was a little bit below the average that we've seen. The 70 this month is outsize and probably a little bit overstating the strength that's there. I do expect government growth to slow on average here moving forward. Healthcare, yeah, maybe it's a little bit of catch-up, but I think it's also just strong demand growth in healthcare too, more so than we see in other industries. You've got a more consistent base of demand growth there. I would expect that to, obviously, probably still slow a little bit from 80,000 average every month, but I think that'll hold up better than almost any industry just given what we know about the demand for healthcare services.
Mark Zandi: Okay, and now onto the household survey.
Dante DeAntonio:: Yeah, I would say the household survey was a little bit of a mixed bag. The headline is obviously that the unemployment rate crept up a little bit higher. The third straight month that it increased by a 10th of a percent. It's up to 4.1. That's the highest since November 2021, I believe. A little bit disconcerting. It's up from a low of three and a half percent just over a year ago. That's not great news. On the more positive side, you got labor force growth that came back a little bit stronger this month. Labor force participation edged higher. Household survey employment increased a modest increase. It was back to positive after it's been pretty rocky road of late. If you look across the board in terms of participation, in terms of employment to population ratios, everything looks good. It looks more positive this month than it's been recently.
I would say aside from the unemployment rate edging a little bit higher, it was mostly good news on the household survey. I'm not sure how much does 4.1% unemployment matter versus 3.9% or 4%. It feels a little bit like splitting hairs here month to month. Obviously, we don't want to see that continue every month here moving forward, but it doesn't feel like a big problem yet. I think, at least for me, it's a watch and wait a little bit longer here before I get concerned about it.
Mark Zandi: Okay. Generally you're sanguine about the slowing and easing up of the labor market?
Dante DeAntonio:: I am, yeah.
Mark Zandi: You are? Okay. All right, Marisa, what do you think? Are you as sanguine as Dante is?
Marisa DiNatale: I think so. If you look in the details-
Mark Zandi: Are you trying to get in touch with your emotions? Is that what's going on? I think so.
Marisa DiNatale: I'm still working through it.
Mark Zandi: Working through it? Okay.
Marisa DiNatale: Yeah, it's early. I think that if you look at the details of the household survey, look at, for example, the reasons that the unemployment rate rose. It still is not layoffs or people losing their job. It's still all coming from... This month people quitting rose in the household survey as did people entering the workforce for the first time or reentering after a break. The number of job losers fell. There's certainly evidence that it's harder for people to find a job when they're looking now, and we can get into that more. But, again, it's not companies laying people off yet. That's the loan holdout here, right? We haven't really seen that. We've seen jobless claims rise over the past month or so, but this is what happened last summer too. It feels almost like a seasonal phenomenon. Then they proceeded to fall, and they're still low.
They're still not in worrisome territory. We got a challenger layoff report this week too, that showed that the number of layoffs was also down. The JOLTS data came out the other day. That also shows... It's really hiring and quitting that are down over the past year, it's not people being laid off. That gives me some solace in the softness going on in the labor market right now. Then even on the payroll survey side, yes, we have this big concentration of jobs in government and in healthcare, but the one-month diffusion index of employment rose over the month. We still have a whole bunch of industries. Most industries adding to payrolls or holding payrolls steady. We did have some losses in manufacturing this month and in retail trade, but other than that there's still gains going on. Wage growth is slowing, not collapsing, but slowing. We're now under 4% year over year on average hourly earnings. I am cautiously optimistic that this is heading down and a graceful way and it's not imploding, right? It's not going down at a rate that is worrisome, yet. But we all know that that can change pretty quickly too.
Mark Zandi: Right. I did notice in the BLS report, going back to those revisions that the BLS will next month release an estimate of the so-called benchmark provision.
Marisa DiNatale: That's right. Yep.
Mark Zandi: Do you want to explain that very quickly?
Marisa DiNatale: Sure. This is something they do every year where they take... The payroll survey is a sample of half a million businesses and they draw that sample from unemployment insurance record, so every employer basically has to pay into the federal and their state UI system. Based on those UI payroll records, they have a kind of near universe count of employment that they then reconcile the payroll survey to every year. They will do a preliminary release of this with next month's data, but then they will actually do the benchmarking, which means they'll go in and they'll adjust the payroll survey estimates going back to March of the previous year. They'll do that with the release of the January 2025 data. We get a preview of what those revisions will be. Typically, the revisions are small. They're usually like 10th of a percentage point in payroll employment.
That can vary. It can vary based on industries. Some industries are harder to capture responses from than others when the government does this survey. I will be looking to see if there are big downward revisions to the benchmark to the payroll survey. One of the features over the past couple of years has been this big divergence between household employment and payroll employment, unusually large. Some people think this could indicate that we're going to get a downward revision to the payroll survey, which has looked stronger. Other people have said, "No, it's the household survey that's wrong. It's not capturing the surge in immigration that we have coming into the country." This will really show us, I think, which survey has been more accurate over the past year
Mark Zandi: Or both. It could be some combination.
Marisa DiNatale: It could very well may be some combination of both, and it may be difficult to tease out how much.
Mark Zandi: Right. Okay. We do get some lagged data, so-called QCEW, Quarterly Census of Employment and Wages, I guess, and that is based on a full count, I guess, of JOLTS.
Marisa DiNatale: Yeah, that is the data they will use to do the benchmark. That's right.
Mark Zandi: I haven't looked at that. Dante, maybe you have. The QCEW data, which gives us some hint about what could their benchmark revision is going to look like. Any information there?
Dante DeAntonio:: Yeah, we don't have the first quarter data yet, which is what they're waiting for to do that preliminary revision. But the data is leading up to that. The data through the end of last year certainly are signaling that we're likely to get a downward revision. I don't think it looks at this point that it's going to be huge by any means, but certainly the likelihood here is that it'll cut some... The average monthly job growth in 2023 and early 2024 is likely to be slightly lower than it was previously reported.
Mark Zandi: Okay. This gap between the growth in jobs as measured by the payroll survey, the survey of businesses and the employment is measured by the household survey, survey obviously of households, is probably going to narrow in part because of these revisions to the payroll survey down. I assume at some point, once the immigration numbers are more realistically embedded into the estimates of population counts from census, I guess we could get an upward revision to the household employment numbers. Does that happen? That doesn't happen, does it?
Dante DeAntonio:: They don't actually revise [inaudible 00:19:20].
Mark Zandi: They don't rev.
Dante DeAntonio:: You'll see basically a jump off potentially if you get a significant change in the weights. But, yeah, they don't actually go back and revise [inaudible 00:19:28].
Mark Zandi: They don't revise. Okay. Cris, are you as sanguine as Dante and Marisa are?
Cris deRitis: I'd say overall. Just at face value, I'd say it's a good report.
Mark Zandi: Trying to figure out your emotions on this one as well?
Cris deRitis: No, I think I'm just figuring out the wording.
Mark Zandi: The wording? Okay.
Cris deRitis: A way to describe my feelings.
Mark Zandi: Your emotions? Got it. Which can be hard.
Cris deRitis: On that note... What's that?
Mark Zandi: Well, it's not only hard figuring out what your emotions are, but it is equally as hard to figure out how to express them. That's what you're saying.
Cris deRitis: That's right. That's right. This report has a bit of that mixed emotion feeling to it, right?
Mark Zandi: Right.
Cris deRitis: The downward revisions give me a little bit of, oddly enough, some comfort because it was more consistent with some of the other data we've been seeing.
Mark Zandi: Right.
Cris deRitis: The top line number is still good. It's still strong. It's not a collapsing labor market. But I think we're at that uneasy point where... Again, to use the old aircraft landing on the tarmac description. We're kind of at that point where we're right about to land on the runway there, but could easily go a little too low and crash into the ship. That's the unease [inaudible 00:21:05].
Mark Zandi: It's all kinds of metaphors now.
Marisa DiNatale: It's an aircraft carrier apparently.
Mark Zandi: Okay. That reconciles.
Cris deRitis: Sorry if that wasn't clear.
Marisa DiNatale: No, it wasn't. When you think of a plane landing, you don't usually go to aircraft carrier.
Cris deRitis: Oh, okay. Well, we've talked about aircraft carrier in the past.
Mark Zandi: Oh, there you go. Okay, so what would you say?
Cris deRitis: Good report.
Mark Zandi: Good report. Okay.
Cris deRitis: It serves the Fed's purpose. I think that's a positive... September rate cut still in view based on this report. But do we have a 3.9% average hourly earnings, gross?
Mark Zandi: Yeah, no one mentioned that. That's the wage number in the report.
Cris deRitis: Yeah, so-
Mark Zandi: Pretty good, right?
Cris deRitis: Pretty good, yeah. From that perspective, everything makes sense moving in that soft landing direction. Again, got to be a little cautious here that things could get restated, right? There could be further revisions, and certainly there are some of these trends here that could easily go a little softer than we'd like.
Mark Zandi: The other statistic that I often look at to gauge the strength of labor market is weekly hours. How many hours people are working each week. I didn't catch that. Did you guys catch that?
Marisa DiNatale: It didn't change.
Mark Zandi: It did not change?
Marisa DiNatale: No.
Cris deRitis: No.
Mark Zandi: Okay. That has normal-
Marisa DiNatale: They're still low.
Mark Zandi: They're still low?
Marisa DiNatale: They're low, right? Yeah. But it didn't go lower. It didn't change.
Mark Zandi: It didn't go lower in the month.
Marisa DiNatale: No.
Mark Zandi: Okay. All right. Well, I look at this through the prism of what the Fed should be doing, because that's the key question at the moment. And it feels like to me... And I agree, the numbers are consistent with an economy that's okay and doing pretty well, but throttling back, and that's by design. The Fed's been working to keep a lid on growth and get inflation back in the bottle, so to speak. This would be consistent with that, but it feels like it's more on the soft side, and an argument for why the Fed should start cutting interest rates sooner rather than later. This idea or this view in markets, and it's in our baseline forecast as well, that the first rate cuts in September, that feels like that's a long time from now.
It feels like it should be earlier than that, like at the July meeting, the upcoming meeting of the Federal Reserve. Not only because growth is slowing and you can see it now even in the job numbers. Previously it was in other data, not in the job numbers, but with today's numbers you can see it. But the inflation statistics also really pretty good. Last month they were great, in the month of June, both CPI and the consumer expenditure deflator. It feels like to me, strong arguments for the Fed to start cutting interest rates here and not crashing that plane into the ship. I think that would be helpful at this point. I'm growing a little bit more nervous about slowing and what's going on in the job market. The other thing their visions remind us of is it can change our perceptions in an instant, right?
Dante was saying last month we thought the average monthly job growth was 250K. Now we see with the revisions, no. If there are 200K, we're lucky. They're probably less than that. It feels like got to be really careful here, given the quality of the information and data that we're getting and will err on the side of doing too much here. Okay, why don't we do this? Why don't we play the statistics game, and then we'll come back and do a deeper dive into the bowels of what's going on in the labor market, see if we can tease things out a little bit more, and then we'll call it a podcast. We'll make this a short podcast because this is, again, Friday after July 4th. I think we have off, don't we? Do we have off?
Marisa DiNatale: No.
Mark Zandi: Oh, we're working.
Marisa DiNatale: You have to work today.
Mark Zandi: Okay. Maybe it won't be a short podcast. I didn't know that.
Marisa DiNatale: I know.
Mark Zandi: I thought everyone has off. No?
Cris deRitis: No.
Mark Zandi: Okay. All right.
Marisa DiNatale: No.
Mark Zandi: Okay, the stats game. We [inaudible 00:25:39] before a stat. The rest of the group tries to figure that out through deductive reasoning, questions. And the best stat is one that's not so easy. We get it immediately. One that's not so hard, we never get it. And if it's apropos to the topic at hand, all the better. As tradition has it, we start with Marisa. Marisa, what's your stat?
Marisa DiNatale: My stat is 9.8.
Mark Zandi: Percent?
Marisa DiNatale: No, I'm not going to tell you the units.
Mark Zandi: Not going to tell me the units. Employment related? Job market related?
Marisa DiNatale: Yes.
Mark Zandi: An employment report?
Marisa DiNatale: Yes.
Mark Zandi: Payroll survey.
Marisa DiNatale: No.
Mark Zandi: Okay. That means it's the household survey, just to be complete and precise.
Marisa DiNatale: That's right.
Mark Zandi: I know how tricky you are.
Marisa DiNatale: That's good.
Mark Zandi: Yeah. And it's not a combination of the payroll or household survey, it's coming right from the household survey. Is it months, 9.8 months?
Marisa DiNatale: No.
Mark Zandi: No. Okay. Is it a ratio of something to something?
Marisa DiNatale: Nope.
Mark Zandi: Dante?
Dante DeAntonio:: It's not an unemployment rate of some kind.
Marisa DiNatale: No, it's not.
Mark Zandi: No, she's saying no. It's not a percent. It's not number of jobs. No.
Marisa DiNatale: No.
Dante DeAntonio:: Is it related to an index?
Marisa DiNatale: No.
Mark Zandi: Should we know this number?
Marisa DiNatale: It's in the report.
Mark Zandi: Really? 9 [inaudible 00:27:11].
Marisa DiNatale: It's not a-
Cris deRitis: There's a lot of numbers in the report.
Marisa DiNatale: ... statistic we talk about a lot.
Mark Zandi: Oh, it's not?
Marisa DiNatale: No, but it's one I think bears watching right now, given our conversation.
Mark Zandi: Oh, interesting. Is it related to unemployment?
Marisa DiNatale: It is.
Mark Zandi: Okay. I want to say something-
Cris deRitis: Total weeks? Is it duration of unemployment? Is that... Yes.
Marisa DiNatale: Bingo. You got it.
Dante DeAntonio:: Cris got in there first.
Mark Zandi: Weeks?
Marisa DiNatale: Yeah, it is the median duration of unemployment for people that are unemployed. It's 9.8 weeks, and this is up by almost a full week from a year ago. This was up from 8.9 weeks last month. Now it's 9.8 and it was 8.8 a year ago in June. How long it's taking people to find a job has been creeping up over the past year. Again, I think this goes to reduced levels of hiring, lower number of job openings. Fewer people are quitting, which means lower job openings, right? The people that are out there looking for a job, and we know most of those people are people that are coming into the labor market either for the first time or again after a break, they're finding it harder to find work.
Now this isn't that much different from what this statistic was prior to the pandemic. It's where it was in late 2019 or so. When I look at all these statistics, this really reminds me of the 2019 job market. I think it increasingly very much looks like this, right? If you look at 2019 compared to the previous years, 2017, 2018, we did see weakening in the job market in 2019 compared to those previous years. And where we are right now really feels like that to me on a number of different levels.
Mark Zandi: Of course, the Fed had the same dynamic then too, right? Because the Fed had jacked up interest rates, fearful that the economy was getting ahead of itself. Inflation would pick up and jacked up rates and slowed things down. Of course, we had the trade war at that time also slowing things down. But the Fed ultimately backtracked and started cutting interest rates, if memory serves, even well before the pandemic hit. They were starting to cut rates again. Oh, that's interesting. Any granularity on that 9.8 weeks? Anything like across demographic group? Is it [inaudible 00:29:50].
Marisa DiNatale: I don't have it across demographics, but the share of people that have been unemployed for 27 weeks or more reached 22.2% last month, which I don't know how far back you have to go to see that number, but certainly more than a year ago. Again, people that have been out of work for a while... That's about what? That's about six months, I guess? That share has certainly grown higher, again, in proportion to this downdraft in hiring rates and job opening rates, which should suggest that it's a little more difficult to find a job. One thing that we noted in last month's job report was that, if you remember a month ago, we were looking at a big decline in household employment, and it was mainly among people 20 to 24 and 55 and older.
Those things turned around this month. We got a gain in household employment, but we did see that the number of people, 20 to 24 coming into the labor force jumped up actually a bit more than it normally does on a non seasonally adjusted basis in June, which could suggest that a little of that last month was just a shift in seasonal patterns. Yeah, something to keep an eye on for sure. And I totally agree with you. I think the Fed needs to start cutting. I think this is becoming increasingly uncomfortable to wait like this.
Mark Zandi: Yeah, I guess at 9.8, the lengthening duration of unemployment also is consistent with continuing unemployment insurance claims, right?
Marisa DiNatale: Right.
Mark Zandi: We look at initial claims, that's folks that just lost their job and file for unemployment insurance, but we also can count the number of people who are on the rolls getting unemployment insurance continuing claims, and that continues to slowly but inexorably continue to rise, so consistent with that. Oh, interesting. That was a good statistic. Very good. Dante, you want to go next?
Dante DeAntonio:: Sure. Let's go with 83.7%.
Mark Zandi: Sounds like a labor force participation rate.
Marisa DiNatale: Or an employment population ratio. Is it prime age?
Dante DeAntonio:: It is prime age.
Mark Zandi: Prime age.
Dante DeAntonio:: Which one of you [inaudible 00:32:18]?
Mark Zandi: Labor force participation.
Dante DeAntonio:: Mark's the winner there. It's labor force... They're both good.
Mark Zandi: Only because I know what epoch for prime age is, it's like 80.8 or something.
Dante DeAntonio:: 80.8, yeah, which is also very good. But the prime age labor force participation rates, it's risen now three months in a row. It's at a high for the cycle now at 83.7%. Pre-pandemic high was 83.1%. Unemployment rate's creeping up, but participation continues to creep up. Employment population ratio is holding steady basically at its cycle high. When you look at that prime age group, we've seen lots of noise in young workers and older workers, but that prime age group is basically rock solid at this point in terms of their participation, their engagement in the labor force. If you look men versus women in that prime age group, there's no weakness for men. I think it's at an all time high... Not all time high, but it's back to a cycle high.
I think for women, it's actually just off an all-time high from last month, just below 78%, which is you're basically at an all-time high. We've drawn people back in, which, I think, two years ago, the concern was can we continue to generate labor supply? We've certainly done that. I think, despite some of the weakness here, there's a lot to be happy about in terms of how people have reengaged with the labor market over the last year.
Mark Zandi: The overall participation rate across all age groups, that's flat, right? That hasn't really budged much here?
Dante DeAntonio:: Actually, it dipped a little bit last month and it did rebound a little bit this month, but it hasn't moved a whole lot over the last year or so.
Mark Zandi: But you're saying, for prime age workers, 25 to 54, that is up and that is above its pre-pandemic level?
Dante DeAntonio:: [inaudible 00:34:05], yeah.
Mark Zandi: Now could that also go back to the immigration surge that Marisa was mentioning that immigrants tend to have higher participation rates than the native born, and that might be pushing up that group. Is that a possibility?
Dante DeAntonio:: Yeah, I think it certainly could be providing a little bit of lift. Yeah.
Mark Zandi: Okay. All right. But your basic point is folks are engaged in labor market?
Dante DeAntonio:: Yeah.
Mark Zandi: No problem there. Okay. Good. Cris, you're up.
Cris deRitis: All right, 2,666,500.
Mark Zandi: Jobs?
Cris deRitis: Jobs.
Mark Zandi: From the payroll survey.
Cris deRitis: Yes.
Mark Zandi: Is it the increase over the past year in payroll employment?
Cris deRitis: No.
Mark Zandi: No, that would be too easy, but that's probably pretty close, I bet. Two million... What'd you say? Two million what?
Cris deRitis: 2,666,500.
Mark Zandi: Okay, so it's jobs. It's change in jobs?
Cris deRitis: Nope. It's a level.
Mark Zandi: A level in jobs.
Dante DeAntonio:: Industry level. Is that a particular industry?
Cris deRitis: Yes.
Dante DeAntonio:: Oh, it's temp help. It's got to be temp help.
Cris deRitis: Oh, there you go.
Mark Zandi: Temp help.
Cris deRitis: Yeah, temp help.
Mark Zandi: I was going to say that by the way.
Marisa DiNatale: That's just... Sorry, what is that, Cris? It's the...
Cris deRitis: Level of temp help employment. Yeah.
Marisa DiNatale: Okay.
Cris deRitis: It's a level. We mentioned the change earlier, which is 49,000, right? Dante covered that.
Dante DeAntonio:: Right.
Cris deRitis: The level is low relative to history. We've been shedding a lot of these temp help jobs now for the last couple of years. That's been trending down. Then I went back and looked, and this is the lowest level since 2013.
Marisa DiNatale: Wow. Interesting.
Cris deRitis: Well below what we had prior to the pandemic. Is this a sign of that further weakness that's going on? Typically, a business might shed their temp help if they're seeing weakness on the horizon, or is this a structural change in the economy? Could be businesses adapt because there's more flexibility elsewhere. Maybe they don't rely on that temp help component anymore. Again, some mixed messages here.
Dante DeAntonio:: Yeah, this was part of... I'm going to plug EV, part of a commentary we wrote on traditional recession signals, I wrote a little bit about temp help and what's going on there. In case anyone's interested.
Mark Zandi: But what's going on, Dante? Temp help has been steadily declining, which historically would signal a broader weakening in job creation because businesses stop using temp help before they start reducing their own payrolls. And this is a pretty substantive sustained decline. What's going on?
Dante DeAntonio:: I argued, it's a couple of things, right? Immediately after the pandemic, you had this huge surge in temp help. It reached an all time high in terms of level. It always made sense that it needed to probably correct itself. Firms were leaning too heavily on temp help in the wake of the pandemic. They weren't ready to bring full-time employees back on. The first maybe 12 months of decline brought temp help back to its pre-pandemic level, which felt like it made sense, but it's continued to come down since then. I think it's probably a combination of two things. One, I think because the labor market is so tight, I think there's been a little bit of a structural shift away from temp help usage, right?
Firms are saying, "I want to bring full-time workers on. I don't want to worry about temp help employment because the labor market's so good." And two, I think even though temp help gets filed under professional business services, a large portion of temp help is dedicated to manufacturing and transportation warehousing. Manufacturing and transportation warehousing have not been doing well for the last 12 to 18 months. I think a lot of that weakness that you're seeing is really carry over from those industries flowing into temp help. Those industries are using temp help less frequently. I think we would like to have seen bigger-
Mark Zandi: That's more about a shift in demand as opposed to a broader weakening in demand. People are just buying less goods. Right? Okay.
Dante DeAntonio:: I think that's part of the reason why we haven't seen a whole lot of actual decline in manufacturing payrolls because it's showing up in temp help. They're getting rid of those temp workers as opposed to shedding quite as many permanent full-time workers. That's my argument.
Mark Zandi: That's interesting. Many other indicators, yield curve inversion, consumer sentiment is at least measured by the University of Michigan. There's a bunch of indicators that historically have signaled recession, but they're just failing miserably this time, at least so far.
Dante DeAntonio:: Actually, if we go back and look the second half of 2019, we actually saw, I think, temp help employment fell by about 100,000 combined over those last six months of 2019. We saw some of the same weakening happen in a similar tight labor market where I think that same structural shift was starting to happen. Then, obviously, got blown up by the pandemic. I don't think it's that unusual that we start to see temp help pull back a little bit when the labor market's very, very tight.
Mark Zandi: Right. Cris, anything else to add?
Cris deRitis: No, I think that's just another indicator to watch, right?
Mark Zandi: Yep. Okay. All right. I've got two numbers of 49.3 and 46.1, 49.3 and 46.1.
Marisa DiNatale: Are those the ISM non-manufacturing indices? Service sector? One is the total, one's employment.
Mark Zandi: You're barking up the right tree, but you got the wrong...
Marisa DiNatale: Indexes within it?
Mark Zandi: Yeah.
Marisa DiNatale: Am I in the right report?
Mark Zandi: Half in the right report.
Marisa DiNatale: [inaudible 00:40:03].
Mark Zandi: That's a big hint. Manufacturing and services. Yeah, there you go.
Marisa DiNatale: Okay.
Mark Zandi: And what is it? What indexes are we talking about? Not the total.
Dante DeAntonio:: Got to be employment.
Marisa DiNatale: Employment?
Mark Zandi: Yeah, employment. Yep. Very good. Yeah, good one, Marisa. That was good. The ISM manufacturing survey puts... Their employment index was at 49.3, so above 50 expansion below 50 contraction. Then services was weak. Of course, that bounces around a lot month to month, recently 46.1, so well below that 50 threshold. If you took an average of those two surveys, which are supposed to be measuring what's going on economy-wide services and manufacturing, it's below 50. Says the job growth certainly shouldn't be creating, whatever it was, 206,000 jobs. It would be much weaker job market. But nonetheless, still clearly signaling some weakness there. Now the ISM surveys are a combination of hard facts and also people's sentiment, perceptions in businesses have been worried. By the way, this is probably a good place to plug the Moody's Analytics survey of business confidence.
It's a weekly survey. We've plugged it in the past. We need folks to respond to the survey. We've been doing it back for over 20 years now, weekly, back to 2003. It's very valuable. I find it a very useful survey, but we need folks to respond to that, so please do. I know this is a holiday week, so I'm fearful we're going to get a low number of responses. Take some time out, a minute or two, and fill out that survey. We really appreciate it. But my point is, people's sentiment, feelings about things have been consistently darker, at least in aggregate than the reality of what's going on. That's clearly the case in the ISM surveys, but nonetheless, another indicator suggesting some weakness here. Okay, before we call it a podcast, what I thought we would do is consider the labor market from the prism of the Job Openings and Labor Turnover Survey report.
This is another monthly survey that BLS does, that breaks down what's going on in the labor market and what's driving job growth in terms of hiring, in terms of layoffs and firing, in terms of people quitting. There's also good data on unfilled positions, and I thought we take each one of them in turn and just maybe turn to you, Dante. You can give us the facts and how you think about what they're saying to us right now. First up, let's go to unfilled open job positions. What's going on there and what do you think it means?
Dante DeAntonio:: Sure, openings have been steadily declining now, barring month-to-month volatility for at least the last 18 months. They're just above eight million in May, which was actually up a little bit from April. If you look at the openings rate, it's actually finally starting to get within a stone's throw of where we were pre-pandemic. Openings seemed unusually high and have seemed unusually high for quite a long time now. It feels like we're finally starting to get back to a place where openings seem more realistic. There's still elevated relatively pre-pandemic in terms of level and rate, but certainly getting a little bit back closer to that level.
Mark Zandi: I think based on rate, we're pretty darn close to its...
Dante DeAntonio:: It's pretty close to the 2018 rate. The openings rate actually came in a little bit in 2019. It's depends what you're comparing to. But yeah, we're getting there compared to where we were a year or two ago. An opening seemed just wildly optimistic about the situation.
Mark Zandi: Right. Your interpretation is we're normalized on...?
Dante DeAntonio:: Yeah, I would expect them to continue to come in a little bit here over the next 6 to 12 months. I don't think we're out of a position here where if they keep falling, we should start to be worried yet. I think we've got a little bit more room to run before I would start to get concerned about the level of openings.
Mark Zandi: Okay. Cris, any additional take on that?
Cris deRitis: I was going to ask maybe, Dante, what your thoughts are around the so-called phantom job openings. If you still think that that's an issue or Greenfield type of job openings, companies that just post an opening to see what's out there, but they don't really have a strong intent to hire anytime soon. Is it still inflating the number?
Dante DeAntonio:: It just feels like maybe we've rung most of that out of the system. Maybe that's happening less just given the level of openings today. I wouldn't say I'm not concerned about it. My bigger concern is obviously the response rate to the JOLTS survey is very, very low still. I think in terms of month-to-month volatility and just how much you can trust any individual number, I don't feel great about it. I think we've got to take pretty long averages here to feel good about what things are and where we should expect them to be, but...
Mark Zandi: Right. Okay. How about hires? What's going on with hires?
Dante DeAntonio:: Yeah, this is obviously is the one, I think, that's caused the most consternation amongst people over the last 6 or 12 months. I'm not sure that I got into that.
Mark Zandi: And by the way, can I just preface this with a few anecdotes?
Dante DeAntonio:: Sure.
Mark Zandi: Here on the New Jersey beach, I'm with broader family, a lot of cousins and a lot of nephews and nieces. People that are in their 20s and going here in their careers, and they're starting to switch jobs. They're naturally switching jobs for different reasons. They're telling me, again, this is the anecdote sitting around after we play Spikeball and volleyball and run into the ocean and run quickly out because it's pretty cold. We're sitting there chatting and they're saying, "I'm having a hard time finding a job. I'm applying consistently. I'm aggressively going after jobs, but businesses are not hiring." That's my anecdotal prism and perspective. Is that borne out in the hiring data?
Dante DeAntonio:: Certainly hiring has slowed dramatically over the last two years, right? We were at a outsized pace of hiring back in 2022, when businesses were still recovering from the pandemic and still staffing back up again. We're clearly well below that. And we're not only below that, but we're back below what the pre-pandemic normal was for hiring. The average hiring rate in 2019 was about 3.9%. Now it's at 3.6. It's been as low as 3.5 here recently. The pace of hiring is certainly slower than it's been recently, slower than it was pre-pandemic. I think part of that is a function of what's going on on the other side of things, right?
You've got layoffs that are still very, very low. You've got the quit rate, which is much lower. Firms, to maintain a level of staffing don't have to do much hiring, right? I think part of that hiring rate is being controlled by what's going on on the turnover side of things. There just aren't a lot of people that are leaving their jobs either voluntarily or not voluntarily, so the baseline level of hiring is a little bit low because of that, which makes it feel like it's hard to get a job for people just because... I think that churn in the labor market is slowing pretty dramatically here.
Mark Zandi: Marisa, do you hear those anecdotes too about the hiring or is it just me?
Marisa DiNatale: I haven't heard the anecdotes, but we see it in the household survey data. People that are new entrance and reentrance into the labor force, it looks like it's taking them longer and it's harder to find a job. That has accounted for the updraft in the unemployment rate over the past few months. It's not layoffs. What's interesting is if you look at it by industry, you see where... I don't know, Dante, if you've looked at this. If you look at the hires rate by industry, it seems to be more... This is contrary, Mark, to, I think, what you're saying, but it seems to be more of blue-collar industries where that's come down a lot. You see the hires rate in manufacturing come in a lot. Construction, it's actually held up. You see it in trade, transportation, utilities.
Where you don't see it as professional business services, finance. You see that's held up over the past year. I'm just looking over the past year, it may well be down if you look at a longer time period. But the big ones for job openings and hiring is leisure hospitality, and other services. These industries that had these huge holes to dig out of and where we were seeing a lot of the job growth and a lot of the turnover come a couple of years ago, that's where we've really seen it slow down.
Mark Zandi: Yeah. Well, you brought up quits and it is hard to talk about hires, I guess, without talking about quits.
Marisa DiNatale: Right.
Mark Zandi: Quits are way down as well. Of course, they surged back three years ago when we were coming out of the pandemic. It's hard to disentangle causality here, and that matters, right? Because, Dante, you were intimating, the causality goes from less quits to less hires. And the argument is, "Well, we saw all these people quit their jobs two, three years ago. They got into new jobs. They're happier with those jobs. They're higher paying. They're better suited to their skills and talent." If you look at surveys, people do seem to be happier about the jobs that they took and they're not going to move again for a while or at least a few years, so we're on the other side of all those.
We was the surgeon quits, now we're seeing a dearth of quits. And if you don't have quits, that means positions don't open up and you don't have hires. If that's the interpretation of what's going on, that feels more sanguine, like how you sound. You're kind of sanguine. But if the causality is working in the other direction, that people are not hiring because demand is down and they're just more cautious, businesses are more cautious. Then people see that there's no hiring going on, so therefore they don't quit their jobs, so the quits are down. How do you disentangle all that? Or can you disentangle all that?
Dante DeAntonio:: I'm not sure that you can. I think it's almost certainly a mix of both, right? I don't think it's purely running one way or the other. I think there's a little bit of both things happening where obviously people feel good about quitting their job when there's lots of open positions and there's lots of good jobs to switch into, which I think is what we saw happening two years ago when quits were sky-high. People were taking advantage of the fact that firms were desperate to hire people. They were willing to give out big pay increases for people that were switching jobs, and so people jumped on that bandwagon. I think some of that now, as people are feeling a little bit more pessimistic about the future course of the economy. You don't want to switch jobs now and be low man on the totem pole in a new job when layoffs might come 6, 9, 12 months from now.
I think some of it is certainly a darker interpretation where people are feeling less optimistic about the labor market and that's causing that quitting to ratchet down, and that's causing demand for firms in terms of hiring to pull back. But I don't think that's the whole story. I think some of it is that positive side still, where people maybe switch jobs, they're just happier where they are now. They don't feel the need to quit. They got what they wanted a year ago when they made a switch and they're more content. That's led firms to have to hire less because they've got a more stable workforce. I think it's a mix of both in my mind.
Mark Zandi: Although it sounds like you're more on the positive side than negative side.
Dante DeAntonio:: Yeah, I would say I'm more positive than negative, sure.
Mark Zandi: Yeah, the causality is running mostly from no quits, therefore no hires.
Dante DeAntonio:: Yeah, I would say so.
Mark Zandi: Okay. Cris, do you have a perspective on this? A view on this?
Cris deRitis: Yeah, I got kind of an oddball question for you. Do you think the promise of automation is having any impact on this? Are businesses saying, "You know what? I'm not going to really aggressively hire here because I believe I'm going to get this-"
Mark Zandi: That's demand. That's a negative perspective.
Cris deRitis: Yeah. I'm going to get this AI dividend or automation dividend going forward.
Mark Zandi: I've heard that before. Yeah, that AI dividend.
Cris deRitis: What are your thoughts, Dante? I know you're a big proponent.
Mark Zandi: He's going to say, "Nay, maybe. I don't know." How do you like my impression of Dante?
Dante DeAntonio:: I don't doubt that firms feel that way. I'm skeptical of whether or not you get a big enough AI dividend to fill the hole that's left by your lack of hiring, right? My feeling is that maybe 6, 9, 12 months from now, those firms actually do go back and hire people because they realize they're not getting a big enough pay. I don't doubt that that's probably factoring into some of hiring decisions right now. I just question the validity of it, right? Do you actually get a big enough payoff from AI in that narrow of a timeframe that you're going to hold out on hiring, waiting for that to happen? I don't see it.
Mark Zandi: What do you think, Cris?
Cris deRitis: We actually agree here on the... I think that this idea that the payoff is going to be so quick is going to be tested, and I don't think it's going to work itself out. I am kind of in Dante's camp. Maybe this is a temporary situation where the companies think they're going to get a lot of productivity gain and what have you, and then you're maybe two years down the road, they [inaudible 00:53:49].
Mark Zandi: Oh, but you're saying you think that the reduction in hiring is in part related to businesses thinking that they're going to generate all these productivity gains from, in the specific case of AI, and that's a weakening in demand. That's a more negative perspective on things-
Cris deRitis: In the short term.
Mark Zandi: Yeah, in the short term. Why do you think that's going on? What's the basis for that view?
Cris deRitis: I think there's a lot of speculation going on. You see all the AI companies, the NVIDIA's and whatnot. There's a lot of investment going on in that space. And if businesses are making those capital investments, then they're going to have to face those budget pressures to cut down on labor, at least initially. And the whole business rationale they've given for making these investments is that they're going to get some type of productivity gain. I think that at least in short term they have-
Mark Zandi: If that were the case, you didn't see that in financial services, you would see it in professional and business services. I guess in information technology. Are those sectors where we've seen... According to Marisa, no. Right? Those are sectors where we've not seen hiring down more.
Cris deRitis: I guess I'm not arguing that they're going to resort to layoffs, but the pace of hiring will slow.
Mark Zandi: Right.
Cris deRitis: As a result or could slow.
Mark Zandi: Okay.
Cris deRitis: That's all theory, right?
Mark Zandi: Well, actually, we probably can investigate a little bit. Look at hiring rates across industry. Look at some measure of AI penetration by industry, or where at least in theory expect to see AI penetrating and see if there's some relationship there, but that's interesting. Okay, layoffs. Dante, what's going on with the layoffs? Low?
Dante DeAntonio:: Absolutely nothing. It depends what number you're looking at. But if you look at the layoffs number from JOLTS, it's been low and rock solid for three years basically since really early 2021. The layoff rate has been basically 1% up a 10th, down a 10th here or there. But it's been rock solid. If you look at UI claims, obviously there's a lot more noise on a week-to-week basis, and you have to decide how much of that is real and something to worry about and how much is not. As Marisa alluded to earlier, claims are certainly up over the last six weeks or so. I don't find it to be alarming at this point. Last week they were 238, I think. If you look at a 12-week average, which is what I usually look at to get a better sense of the trend, they are up to about 225.
Again, you saw all the same thing happen last summer where the 12-week average actually peaked at, I think, 245. Weekly claims got up further than that, 250, 255 a couple of times last summer. Then we saw it come right back down. It almost feels like you've got this little bit of a shifting seasonal pattern where you always had a spike in July where claims picked up. Last summer it looked like it broadened out a little bit, so it created this big spike in seasonally adjusted claims, and it feels like that same thing's happening again. I wouldn't be surprised if they keep rising a little bit further here as July moves on. I wouldn't be surprised if we get a week that's 250 or even slightly above that.
Again, I think, until we see that sustained over the course of 6, 8, 12 weeks, it's not something that I'm overly concerned about, especially given all the other data that we have that suggests that layoffs are not moving. In JOLTS and the Challenger Report, job cut announcements over the month are down. The first half of this year was lower than the first half of last year. There's really nothing else outside of claims to suggest that there's been any meaningful uptick in layoffs.
Mark Zandi: Right. Marisa, do you have a different view or are you in tune with that?
Marisa DiNatale: No, really, again, if I look across industries, the only real significant place I see layoffs is in real estate related positions within financial services, which makes sense given the housing market. It's pretty remarkable when you look across industries that you really don't see much movement at all anywhere in terms of layoffs over the past year.
Mark Zandi: The [inaudible 00:58:35] theory has been, or the most common narrative has been why there's no layoffs? Why they've been so low? Is just labor hoarding, that businesses have been through a pretty difficult time holding onto their staff and staffing up because of the pandemic. It goes back even before the pandemic, when the labor market was very tight and they don't want to be wrong-footed. They don't want to lay off workers and then discover that they're short again and have to rehire and go through that process. It can be very costly. The bar for laying off here is pretty high because of the labor shortages that businesses have been experiencing now since 2018, 2019, that period. Cris, does that resonate with you, that argument? Or is there another argument why layoffs have been so low?
Cris deRitis: It resonates a bit with me, but I'm a little skeptical that this can maintain that hoarding argument for an extended period of time. I think the demand is real. I think-
Mark Zandi: Demand is real?
Cris deRitis: ... that they are hiring because they need workers today and they're not just preparing for an eventual down cycle.
Mark Zandi: Okay. There's nothing special going on here unique to the labor market. It's just that there's demand for goods and services and businesses need labor to produce those goods and services. Simple as that.
Cris deRitis: And we do have the demographics, right? Demographic headwinds, retirees. There's still movement, if you will, that was already in play or going to be in play even before the pandemic. I think that's part of it.
Mark Zandi: You're very soft. Is he soft? Is Cris soft? You're very soft.
Dante DeAntonio:: A little bit.
Cris deRitis: Really?
Mark Zandi: There you go. Much better.
Cris deRitis: Okay.
Mark Zandi: Yeah, sorry about that. Okay. Dante, what do you think of that narrative about labor hoarding?
Dante DeAntonio:: Yeah, I think probably in Cris's camp, I feel like maybe that makes a little bit of sense, but it just feels like that's not a sustainable business model. If your demand as a firm... You can only keep a workforce stable for so long in the face of weakening demand, right? If firms really needed to start laying workers off, it feels unlikely that you'd go two, three years and say, "We're just not going to do it because we don't want to have to hire people back, whenever this is over." Right? It feels like maybe in a very short window of time that makes some sense.
"Hey, if I've got this period of softening over a month or two or three, maybe I don't bring the ax out quite as quick as I would have a couple of years ago and start laying people off." But it feels like you can't just keep holding workers for 6, 9, 12 months if your business is going south. I think it's got to be that firms are still feeling pretty good about the economy. There's actual real demand growth there still, and that's wrapping up or keeping layoffs low. It just doesn't feel like that's a sustainable business model over a longer period of time.
Mark Zandi: The way I would put it though, the threshold for layoffs is higher. Not that if demand is consistently weak and I think it's going to continue to be weak, then I'm not going to lay off. I am not arguing that, or I'm not suggesting that that's the narrative. It's just that the bar for actually laying off, given some weakening in demand is [inaudible 01:02:12]. If you've got a lot of folks out there looking for work and demand is soft, not a problem. You just cut back and I'll hire them back. The wages are going to be low, no problem. The bar for laying off is going to be a lot lower. If the labor market's very tight and you've had trouble hiring and holding onto people, remember all the quits we were getting a couple of three years ago, and your demand starts to soften. You're going to be slower to start laying off. You're going to be more reticent, those threshold for actually laying off is higher. As a business person that resonates with me [inaudible 01:02:50].
Dante DeAntonio:: I'd buy that. My question is if the economy actually turns south, how much does that matter that that threshold is a little bit higher? Does it really make a difference at the end of the day?
Mark Zandi: If the threshold is higher, makes it less likely the economy goes south, right? Because at the end of the day, it's the layoffs that spook consumers that generates... Is the catalyst for that self-reinforcing cycle. The fact that the threshold is higher just makes the economy more resilient, less likely to experience that. That would be the argument.
Dante DeAntonio:: Yeah, I buy that.
Mark Zandi: You'd buy that?
Marisa DiNatale: Do you think that the change in the cost structure that businesses are facing since the pandemic plays into this at all? They're facing presumably lower real estate costs, cost of having to maintain an office. There's still a lot less business travel than there used to be prior to the pandemic. We know wages are their biggest expense in the service sector, right? But you have all these other costs that I have to imagine are much lower now than they were five years ago, and maybe that gives them a bit more wiggle room on the HR side. What do you think about that?
Mark Zandi: Well, the way I'd frame that is profit margins are high, therefore there's less pressure to immediately respond to some weakening in demand, especially because the other thing that's happened is businesses, at least in aggregate have locked in the previously record low interest rates. The interest payments on their debt have not really, at least according to the BEA, Bureau of Economic Analysis, risen all that much. There's lots going on in the distribution, but in aggregate... You don't see the same financial pressure to cut. If your margins are paper thin, you're just a little bit above breakeven and demand weakens. You go into DEFCON 1 and pretty immediately as a business person you're cutting.
And the fastest way to reduce your expenses is to cut your payroll, right? You don't have to pay people wages, but if your margins are wide and you're making a lot of money, then you're just going to be slower to do that. You're less likely to do that. Yeah, I think that's a reasonable argument as well. I think that's a good argument, what's going on. Cris, do you buy into that one?
Cris deRitis: I do to some extent. I guess, I just don't see any evidence of labor hoarding on the economics team at Moody's.
Mark Zandi: Well, we've been lean and mean since the beginning of time, Cris, come on. Can't use us.
Cris deRitis: That's my point. I don't think there's been any change here.
Mark Zandi: Yeah. All right. Fair enough. Okay, we add it all up. We end where we started, right? Labor market's okay. Doing pretty well, throttling back, but so far that's by design to cool things off and get inflation down. Allow the Fed to normalize interest rates. We're pretty close to all that. But the ultimate worry is that this thing takes on a life of its own to slow down and gets self-reinforcing. This pickup we're seeing in initial claims for unemployment insurance actually signal something more fundamental. It's not just seasonal adjustment issues. We see the plane land or crash into the ship, as Cris would say. But okay. Before we call this a podcast, anything else we want to bring up? Anything else? Marisa, anything?
Marisa DiNatale: I have a couple of things I'll just say.
Mark Zandi: Okay.
Marisa DiNatale: One is that the three-month moving average of private sector job growth is now the lowest it's been in almost three and a half years. We're at 146K in the private sector. It's quite a change from where we've been. 146 is probably fine. I think it's reasonable to expect that we need more jobs maybe than we used to, just given what we know about population growth and immigration. We probably need a higher level of job growth to sustain a steady unemployment rate. The other thing I wanted to mention, actually, just to go back to the temp help, I was thinking that a few years ago when we got the UAW contract negotiations, there were provisions in that allowed for temp workers to become permanent workers. The auto industry is one of the industries that tends to use temp help a lot.
There were some changes there in those contracts that converted a lot of temp workers into permanent workers over time. That may be something that's going on in manufacturing. Then finally, just keep your eye on talking about recession indicators. We talked about the ISM. We talked about the inverted yield curve. The Sahm Rule, Claudia Sahm's rule that if the three-month moving average of the unemployment rate rises by half a percentage point or more from a 12-month low, that that has almost always signaled the start of a recession. We're just a 10th of a point under that. We just need one 10th uptick in the three-month moving average of the unemployment rate to reach that half a percentage point threshold. Our monthly forecast that we put together has that happening with the July jobs report.
Dante DeAntonio:: But that's a moving target, right? Because that low in a 12-month period is also going to start to drift higher here because we were at a low point basically 12 months ago. Unless you get a big increase next month, I don't think we'll actually cross that. It's splitting hairs really. The unemployment rate up half a percent over the last 12 months. I don't know. Does it matter if we actually crossed the threshold or not. I don't know.
Mark Zandi: That rule, the intuition behind it is what we were talking about. Things start to take on a life on their own when you get to that threshold. Unemployment rises, consumers go more cautious. They start to pull back a bit on their spending. Businesses see the demand weaken. They get past a threshold and they say, "Oh, I got to cut workers." They start cutting workers, more layoffs, and you get into the self-reinforcing cycle. That measured intuition behind it is a signal that you're getting into that dark vicious cycle kicking in called a recession. And historically, that has worked well in predicting it. I worry about that too. I've been the optimist, I was. I was the guy that said, "No recession." But I'm getting nervous. I'm getting a little nervous. Again, I look at it through the prism of the Federal Reserve. These guys, it's time to cut interest rates. Time to cut interest rates. Let's get going. This whole idea about inflation being above target, really? Are you kidding me? The harmonized inflation rate is below target. Our colleague, Matt Colyar.
Cris deRitis: Got it.
Mark Zandi: Someday I'll get that. Matt sent around his estimate of harmonized, excluding owner's equivalent rent, PCE, consumer expenditure deflator. I think year over year is 1.7 on the top line, and it's 1.5 on core, excluding food and energy, get to underlying inflation. Really? Come on. Let's get going here. You don't have to cut 50 basis points or 100... Cut a quarter point. Let's move on. Let's start to take some pressure off the economy. We're there. We're there already.
Cris deRitis: I'll make some room for you on the couch, Mark.
Mark Zandi: I know. I'm there now-
Marisa DiNatale: Very upset.
Mark Zandi: ... I'm with you. Personally, I'm going to kick you guys off the couch because I need full-time help here.
Cris deRitis: He needs it all to himself.
Mark Zandi: Yeah, come on.
Marisa DiNatale: That meeting is next week or the week after next?
Cris deRitis: The week after next.
Mark Zandi: Week after. Yeah.
Marisa DiNatale: Okay.
Cris deRitis: TPI is next week, right?
Marisa DiNatale: Yep.
Mark Zandi: All right, guys. We're going to call this a podcast, unless... By the way, those were really good insights, Marisa. I'm glad I asked. But we're going to call this a podcast. And with that dear listener, we'll talk to you next week. Take care now.